Archive - Apr 27, 2010

The CDS market, as always, is prophetic to the dot: after main deriskers in the past two weeks were Spain, Portugal and France, so far the spread blow out in these markets has materialized like a Swiss watch. Which is why Ambrose Evans-Pritchard better be looking at this week's DTCC data, because the credit market is flashing a bright red warning light over his favorite bankrupt country - the UK (incidentally, the week's largest net derisker, just after Goldman Sachs). Second in order of sovereign implosion - Ireland. The British Isles, at least according to CDS traders who time after time prove they have far more sense than their equity equivalents, are about to become a hotbed of credit activity, and not in a good way. The other countries that fill out the top 10 deriskers in the prior week: Brazil, Germany (yeah, failed auctions do that), Argentina (yeah, persistent threat of default does that too), Mexico (yeah, living next to a money printing terrorist does that), Ukraine, Korea, Belgium and China.

My thoughts on the Goldman hearings. Behind the circus show, there were important themes that need to be underscored.

Recently the general public had the unpleasant experience of seeing what the real face of Warren Buffett looks like when it comes to derivative reform: a man ready to maim and kill to prevent even a minor loss when it involves controlling what he previously called "weapons of financial mass destruction." Sigh - yet another another hypocrite unmasked. However the battle over derivatives is just beginning. As the attached presentation from erdesk.com indicates, the big banks are not about to let a $55 billion annual revenue stream go away without a massive fight. And despite what Blanche Lincoln thinks, with Financial Reform suddenly stalling hopelessly in yet another indication that Chris Dodd's many years of robbing the middle class blind need to end yesterday, derivatives are not going anywhere in a hurry: with $11 billion in IR, $22 billion in FX, $10 billion in Credit, $10.5 billion in commodities and $1.5 billion in mortgages, most of it split between Goldman, DB, CS, MS and JPM, for anyone to think that the firms who run the world will cede such a core part of their business to the exchanges is naivete defined. We recommend the attached simplified overview to anyone who has a passing interest in not only the fascinating $600+ trillion world of OTC derivatives but of ongoing (futile) attempts to reform it.

I think he did.

The promise of green energy has intrigued the Middle East, where concern about future reserves runs deep, but Saudi Arabia's recent plan for a multibillion-dollar investment in traditional oil projects underscores lingering concern about betting on renewables. Riyadh plans to spend $170 billon over the next five years on energy and oil refining efforts; the country's state-owned oil company, Saudi Aramco, will bankroll little more than half this endeavor, according to the Saudi Gazette. The energy giant called it unrealistic for Saudi Arabia to plow into alternative energy sources when the No. 1 cash crop of oil has built its wealth, the report states. "I don’t think that’s surprising,” said Eurasia Group energy analyst Will Pearson of the guarded approach, adding that Saudi Aramco has long been hesitant given the state’s status as the world’s leading oil producer.

Where does it end? 100 billion? 1 trillion? 1 quadrillion? And yes America, this is your money, going to bail out Greece... Then Portugal... Then Ukraine....Then Dubai....Then Italy....Then Spain....Then Hungary....Then the Baltics...Then the UK....Then Japan... and by the time we have to bail ourselves out, there will be nothing left, except the Turbo Bernanke 3000 dry heaving with an empty ink cartridge and empty paper cart, while gold oz will be worth one quadrillion Benjamins (or is that Bernankes). In the meantime, as Erik Nielsen, who finally woke up, predicted, the final bailout cost of Greece alone will be €150 billion. So the IMF will do rookie mistake 101 and keep raising the bailout requirement incrementally, even as the depositor runs on Greek banks and the ongoing strikes and riots, destroy the country...But at least in the meantime the dollar will get devalued and Wells-JPM-BofA/REIT investors will be happy.

Does Goldman deserve the theatrical roasting it has been subjected to all day? Of course. Will anything come out of it? Not too likely, especially with our president, who made a whirlwind global tour on the Volcker Rule, and now is aggressively backtracking behind the shadow of his teleprompter (or at least until the next Massachussettes emerges, and the next, and the next). Yet in order to keep a fair and balanced perspective on things, it may behoove those watching Carl Levin's sanctimonious monologues to realize that the November 4, 1999 vote on S. 900, better known as the Gramm-Leach-Bliley Act, received Senator Levin's full endorsement. If Goldman is the pure, unadulterated evil it is today, it is so only because of idiotic Senators who were corrupt, or stupid enough, or both, to let GLB pass when it did, and usher in the era of unbridled prop trading/hedge funding by banks with full access to the discount window and taxpayer bailouts.

Any attempt at fixing Goldman must begin with reinstating Glass-Steagal - period. Anything and everything else is smoke and mirrors. Yes it will be painful (for the banks), and yes it will cost massive equity losses due to forced spin offs (for bank shareholders), but it will prevent the next scapegoating circus after the fact. How about we preempt these things from happening for once?

Oil prices were under heavy selling pressure throughout Tuesday’s trading session. Prices had been mixed in trading overnight, but one of the first features of trading on Monday night and into Tuesday morning was a resurgent US dollar. Bloomberg reported Tuesday that “Standard & Poor’s Ratings Services (S&P) lowered its long-term local and foreign currency issuer credit ratings” on Portugal, from A+ to A-, and on Greece, from BBB+ and A-2 to BB+ and B, respectively. These revisions hammered the euro and helped the US dollar, and it raised concerns over the near-term outlook for economic recovery and growth in Europe. That, in turn, led to fairly heavy profit-taking around the planet on long equities holdings, and the DJIA fell steeply from the opening bell into the late afternoon. That pulled oil prices lower with it.

Spreads were considerably wider across the board today as the peripheral European nation contagion, that we have discussed, started to spread. The scrambling of debt investors dominated any macro data or earnings today as risk appears to be getting repriced fast and furiously and Main traded wide of IG (for the first time on record) as dispersion rose, low beta underperformed, breadth was terribly negative, and movements were considerable in single-name CDS.

VOLD (NYSE Up-Down Volume Differential) broke below 4/16 opex levels and then some today; registering the single most negative close (-1,621,467) since 3/02/09. A quick look at the S&P 500 E-mini, NYSE Tick, VOLD, VIX, ADD, UVOL & DVOL.

Volume is not dead. It just hides and make sudden surprise appearances when humans actually override the HFT algos upon the realization that Bernanke's Global Put may not be sufficient at this point. So much for low volume as a result of everyone watching C-SPAN - S&P spoiled everyone's part. Although with the whole world crashing and GS positive, at least it was made abundantly clear who runs the world.

RANsquawk Market Wrap Up - Stocks, Bonds, FX 27/04/10

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 27/04/10

Here is the primary risk of why frontloading the US Treasury with ultra-short holdings is just asking for a capital markets/liquidity/solvency/sovereign crisis. So far in April, the US Treasury has redeemed over $484 billion in Bills. That's nearly a half a trillion in mandatory cash outflows, interest payments aside. In April the cash out for interest expense will likely be one twentieth of this. What people don't realize is that the Treasury in April was down to just $9 billion in cash. Unless the UST can roll its debt not on a monthly but now weekly basis in greater and greater amounts, the interest rate doesn't matter. All it takes is one semi-failed auction and it's game over as hundreds of billions in bills become payable.

Heh, the party is over. Why did Goldman Sachs' stock hold up today? Check out the shank jobs they executed on the Mo-Mo Monkeys.